UK: Charities - A Briefing For Charitable Organisations, September 2008

Under the Charities Act 2006, only organisations with aims
'charitable for public benefit' are accorded the charity
label. In this edition of the newsletter, we discuss the definition
of public benefit and how to meet the criteria.

THE PUBLIC BENEFIT TEST

Among the provisions detailed in the Charities Act 2006
is the requirement that the aims of all charities be for the public
benefit.

On 1 April 2008, the Charities Act 2006 definition of a charity
came into effect. The new definition introduces a wider range of
purposes – 13 in all – which better reflect the
diversity of charities that exist today and makes the public
benefit test a legal requirement.

Prior to the introduction of the Charities Act 2006, there were
only four charitable purposes.

The advancement of religion.

The advancement of education.

The relief of poverty.

Any other purposes beneficial to the community.

Those charities with aims falling under the first three purposes
did not have to prove they existed for the public benefit. However,
the Act has removed the presumption that the advancement of
religion and education and the relief of poverty are automatically
charitable. All charities, regardless of purpose, now need to prove
that their aims are for the public benefit.

The 13 Charitable Purposes

The prevention or relief of poverty.

The advancement of education.

The advancement of religion.

The advancement of health or the saving of lives.

The advancement of citizenship or community development.

The advancement of the arts, culture, heritage or
science.

The advancement of amateur sport.

The advancement of human rights, conflict resolution or
reconciliation or the promotion of religious or racial harmony or
equality and diversity.

The advancement of environmental protection or
improvement.

The relief of those in need by reason of age, ill health,
disability, financial hardship or other disadvantage.

The advancement of animal welfare.

The promotion of the efficiency of the armed forces of the
Crown, the police, fire and rescue services or ambulance
services.

Other purposes currently recognised as charitable and any new
charitable purposes similar to another charitable purpose.

Determining Public Benefit

There are two key principles to the public benefit test.

There must be an identifiable benefit.

The benefit must be to the public, or a section of the
public.

Meeting The 'Benefit' Principle

There are three factors to consider when determining whether the
'benefit' principle has been met.

It must be clear as to what the benefits are

The benefits must be recognisable, but do not have to be
measurable. For example, there are many charities that produce
intangible benefits, such as the appreciation of a beautiful
landscape or spiritual contemplation. But just because an
organisation has a particular aim, it does not mean it provides the
benefit usually associated with that charitable purpose. Benefit
must be proven in every case. For example, medical research must be
carried out in a controlled and scientifically rigorous way in
order for a public benefit to arise.

The benefits must be related to the aims

All charities must act within their aims, and each aim must be
shown to be for the public benefit. Some charities might carry out
incidental activities that are for the public benefit but not
related to their aims. For example, an amateur sport charity might
hold a collection for disaster relief. This may be permitted as an
incidental activity, but it would not count towards any public
benefit assessment of the charity's aims.

The benefits must be balanced against any harm or
detriment

'Benefit' means the overall net benefit to the public
after any harmful effects of the charity's activities have been
considered. For example, a charity using a minibus to transport
disabled individuals might also harm the environment by producing
carbon emissions. However, the positive benefits of transporting
the disabled is generally seen to outweigh any possible negative
impact on the environment.

Meeting The 'Public' Principle

There are four factors to consider when deciding whether an
organisation's aims meet the 'public' principle of the
public benefit test.

The beneficiaries must be appropriate to the aims

The question of who constitutes 'the public, or a section of
the public' is based on an organisation's aims. For
example, an organisation that provides a local village hall does so
with the intention of benefiting the people living in that
village.

The opportunity to benefit must not be unreasonably
restricted

A narrow geographical restriction, for example, one street or a
few houses, would be unreasonable. Sometimes, however, it is
appropriate to restrict the benefit to a small class of people if
those people have a particular charitable need, for example, a
disability or disease. In such cases, it may be appropriate to
restrict the benefit based on personal characteristics. Such
restrictions – gender, race, religion – are
acceptable only if they are appropriate to the charity's aims.
In general, charities need to be outward looking and inclusive
rather than inward looking and exclusive.

People in poverty must not be excluded from the
opportunity to benefit

This is one of the factors that all fee-charging charities must
consider carefully. It does not mean that people in poverty have to
benefit, just that they must have the opportunity to benefit.
Poverty is a relative term and will have different meanings
depending on whether the charity carries out its work in the UK or
in developing countries. There are ways in which fee-paying
charities can allow people in poverty to benefit, for example, by
awarding bursaries or allowing free or subsidised access to their
facilities. This must represent a real opportunity for people in
poverty and not just a token provision.

Any private benefits must be incidental

Private benefits are benefits received by a person or
organisation who/that is not a legitimate beneficiary of the
charity. For example, a charity might exist to regenerate a
commercial area and businesses in that area would incidentally
benefit from increased trade. Any private benefit must be
incidental and must result from action intended to further the
charity's aims.

Reporting Requirement

In addition to having to pass the public benefit test, charities
will be required to report on the public benefit they provide from
late March 2009 onwards. There is also a new statutory duty for
trustees to "have regard to" the Charity Commission's
guidance on public benefit.

The proposed changes are intended to build on the existing
requirement for charities to explain their activities and
achievements. Their annual report should clearly demonstrate that
the charity's aims continue to be for the public benefit. The
Charity Commission has not issued example guidance on this, but
intends to publish examples of best practice in due course.

Passing The Test

What Do You Need To Do Now?

Review your objectives. Does your charity have one objective or
several?

Work out what benefit(s) your charity provides in relation to
each of your objectives.

Establish who your beneficiaries are.

Establish who your public is.

Talk to your advisers about any concerns you may have. Maybe
you need to revise your aims?

Consider the reporting requirement at the beginning of the year
in order to plan ahead.

Ensure your annual report includes:

a review of significant activities undertaken, including how
these are for the public benefit

details of your aims and objectives, and how these aims are for
the public benefit

strategies adopted and activities undertaken in order to
achieve these aims

details of your charity's achievements in the period.

MAKING A DIFFERENCE

A number of the rules introduced in the Charities Act
2006 have come into effect over the past year.

The Charities Act 2006 introduced a number of new laws, some of
which enhance the role of the Charity Commission and others which
protect trustees as individuals.

Payment Of Trustees

Since March 2008, with permission from the Charity Commission,
charities have been allowed to pay trustees for providing goods and
services as long as certain rules are followed.

Payment must be for services other than as a trustee.

Terms must be set out in a written agreement.

The arrangement must be in the best interests of the
charity.

If more than one, the benefiting trustees must be a minority of
the trustee board.

The benefiting trustee(s) must not be involved in decisions
regarding the provision of these goods/services.

Trustee Liabilities

Since February 2007, trustees have not been required to ask the
courts for liability assurance. The Charity Commission now has the
power to relieve trustees from personal liability for breach of
trust or duty, as long as they have acted honestly and reasonably.
However, the commission will take any deliberate breaches of trust
very seriously.

Trustee Indemnity Insurance

Charity Commission approval was previously required if a charity
wished to purchase indemnity insurance for its trustees. Since
February 2007, permission is no longer required but:

trustees must be satisfied that it is in the charity's best
interests to purchase the insurance

the charity's governing documents must not prohibit the
purchase of indemnity insurance.

Cy-près

Cy-près is the long-established legal principle applying
to circumstances where donations cannot be used for the purpose
that they were originally intended. Any change in use must be as
close to the original purpose as possible. The Charities Act 2006
introduced a more flexible regime, which came into force in March
this year.

The Charity Commission and the courts can now also consider
current social and economic circumstances when deciding how to deal
with donations that cannot be used as originally intended.

Changes To Thresholds

Audit and examination thresholds for unincorporated charities
and charitable companies have been harmonised. For accounting
periods beginning on or after 1 April 2008, unless otherwise
specified in the charity's governing document, the following
limits apply.

Fig 1: Audit And Examination
Thresholds

Income Threshold

Requirement

Income between £10k and £500k

Independent examination

Income over £500,000

Audit

Gross assets over £2.8m and income over £100,000

Audit

CIOs

The new legal framework for Charitable Incorporated
Organisations (CIO) is expected to come into force later this year.
Setting up as a CIO has several advantages compared with the
current corporate structure.

There is only one regulator – the Charity
Commission.

Only one annual return needs to be filed.

There are no charges for registration or filing.

CIOs do not fall under company law.

There are less onerous reporting requirements. Reporting under
the Companies Act 2006 is not required.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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